Inflation
The mantra that 'gold is a hedge against inflation' needs a little clarity. After all, if gold was such a great hedge against inflation then its price should never fall. However, taking a look at the long term chart of gold we can see that gold does rise and fall over the years and sometimes by a lot like in 1980 and 2011.
The fear of inflation
However, gold is a good hedge against the 'fear of inflation'. Chris Dillow from the FT reports that when we look at the fear on inflation as measured by the gap between 5 year bond yields and their index linked counterparts then gold is a protection. In the last 10 biggest annual rises in this index gold rose in 9 put of 10 of these. So, gold protects against the 'fear of inflation'
A bad type of inflation?
Inflation that is caused by a cyclical upturn can be bad for gold:
- When growth is stronger investors can look to sell gold in order to buy riskier assets. Remember gold gives no interest, so in a risk positive environment that is one less reason to hold
This is why gold did poorly during the last cyclical upturn post the Global Financial Crisis in 2010-2015.
Should I dump my long term gold position?
Not so fast. As long as interest rates remain low, then gold should be supported. If there is a pullback in equities after the recent stimulus exuberance that also makes gold worth having, so it is premature to ditch them now. However, looking at the charts you can see investors dump gold on recovery signs. Pfizer vaccine and large stimulus hopes (prompting US 10 year yields) moves resulted in gold selling on global growth recovery hopes. So, let that guide you on the major narratives for gold once the current drama over GameStop subsides. It may take longer than we would otherwise expect. There is a touch of crusader spirit over at wallstreetbets, so watch out today.
